Aurelia Butler

NEW YORK (Reuters) -Shares of smaller U.S. companies are outpacing a rally in the broader equity market as they draw investors looking to scoop up cheaply valued stocks and those betting the group has already priced in an economic slowdown. The small-cap Russell 2000 jumped 10.4% in July against a 9.1% gain for the benchmark S&P 500, its biggest percentage-point outperformance on a monthly basis since February. Small caps tend to be more domestically oriented, less profitable and carry a heavier debt load than their larger counterparts, often putting them in the firing line when worries over the economy take hold and markets become volatile. This year was no exception: the Russell 2000 has fallen 16% in 2022 despite July’s rebound, compared with the S&P 500’s 13.3% drop, as the Federal Reserve tightened monetary policy faster than expected to fight red-hot inflation and sapped appetite for risk across markets. The small-cap index is now at its cheapest versus the large- cap Russell 1000 since March 2020, according to Jefferies data, catching the eye of some bargain-hunting investors. “There was an enormous amount of damage in the small-cap space,” said Francis Gannon, co-chief investment officer at Royce Investment Partners. “This is among the cheapest segments of the U.S. market.” Gannon has been increasing positions in small caps, focusing on industrials, materials and technology companies in the space. Some investors also believe that prices for small caps – which are viewed as more attuned to the economy’s fluctuations – may already be reflecting a potential recession, limiting their downside if predictions of one come to pass. Data this week showed U.S. gross domestic product contracted for a second straight quarter, fulfilling an often-cited definition of a recession. However, the National Bureau of Economic Research, which is the official arbiter of business cycles, has yet to declare a recession and Fed Chair Jerome Powell said this week it was unlikely the economy was in one, citing a strong employment backdrop. Small caps appear to be “baking in a lot of economic pain already,” RBC Capital Markets analysts said in report earlier in July. “Recessions have tended to be good buying opportunities for Small Caps,” they added. The bank also noted that the Russell 2000’s forward price-to-earnings ratio has been trading in the 11-13 times range, “which tends to mark its bottom.” Citi U.S. equity strategists earlier this week wrote “stocks down the market cap spectrum appear closer to pricing in recession than their Large Cap peers.”Not everyone is convinced it is time to buy small caps. Appetite for shares of smaller companies could quickly sour if inflation remains persistent and the Fed is forced to raise rates more aggressively than expected, inflicting more pain on the economy. The central bank hiked interest rates by 2.25 percentage points already this year as it fights the worst inflation in four decades, but Powell offered little specific guidance about what to expect next during his news conference following Wednesday’s Fed meeting. “There might be some more disappointing economic news to come even though the market is (already) pricing in somewhat of a mild recession,” said Angelo Kourkafas, an investment strategist at Edward Jones, which recommends clients “underweight” small caps for now. The economy’s strength faces a key test next week, when the monthly U.S. jobs report for July is released. Economic data is expected to be especially important for market sentiment in the next two months to give cues for the Fed’s next moves.Analysts at the Wells Fargo (NYSE:WFC) Investment Institute said smaller companies will be challenged to maintain profitability and healthy cash positions as the economy slows. The firm projects the U.S. economy will be in a recession in the second half of 2022 and into early 2023. “We don’t think this move in small caps has legs,” said Sameer Samana, senior global market strategist at the Wells institute. More

Has Fed tightening slowed down the US jobs market? US hiring is expected to have slowed in July, as investors and economists wager that the Federal Reserve’s rapid series of interest rate increases will have started to affect the labour market. The labour department is forecast to report that the US added 255,000 jobs in July, according to a Reuters survey, down from 372,000 in June. The unemployment rate is expected to hold steady at 3.6 per cent. Market watchers have been anticipating a slowdown in the labour market for months. While hiring has weakened modestly this year, forecasts have undershot the data since April. But the Fed’s dramatic efforts to rein in inflation are expected to eventually take a bite out of US hiring. Weaker data from July would compound fears that a recession is looming. Those fears came to a head last week when the US reported that gross domestic product had contracted for the second consecutive quarter. That fits one common definition of a recession, although, an official call will be made later by the National Bureau of Economic Research. A big move higher in unemployment, or a significant dip in hiring, would raise the likelihood of recession and could push the Fed towards more moderate interest rate rises in the future. “A deceleration in hiring towards the early consensus of 250,000 would fit the current [Federal Open Market Committee] view that hiring can slowly soften without deleterious effects. A sub-150,000 reading would challenge that thesis and argue for a marginally smaller tightening,” said Ed Acton, an analyst at Citigroup. Kate DuguidWill the Bank of England raise interest rates by the most since 1995? The Bank of England could raise interest rates by half a percentage point at the next meeting of its Monetary Policy Committee. A half-percentage point interest rate rise would be the central bank’s biggest increase in rates since 1995.Earlier this month, governor Andrew Bailey raised the prospect of a hefty rate rise and said the central bank faced the “largest challenge” to inflation control since gaining independence on rate setting in 1997.The central banks has been under mounting pressure to curb inflation, which rose to a 40-year high of 9.4 per cent in June. The rise in inflation has triggered a wave of industrial action as workers press for wages to match price rises. The rate of UK inflation in June was the highest among the G7 group of large advanced economies. The Office for National Statistics said the main driver was petrol prices, which rose by 18.1 pence per litre, the largest jump since equivalent records began in 1990.Only 29 per cent of the 277 categories checked by the ONS were rising in price by an annual rate less than 4 per cent, double the BoE’s inflation target.Analysts say prices are likely to continue to rise, with further hikes in energy expected in October, but some economists drew comfort from evidence that surging prices were increasingly concentrated in food, energy and fuel, which suggested that inflation was no longer spreading more widely through the economy. Leke Oso AlabiWill Turkish inflation crack 80%? Much of the world is struggling with inflation, but Turkey is suffering more than most. The central bank’s pursuit of an unconventional monetary policy has unleashed annual inflation of nearly 80 per cent as the lira hits record lows.Inflation is expected to hit a fresh two-decade high when the state statistics agency releases data for July on Wednesday, analysts said. It recorded 79 per cent inflation in June, the highest among G20 nations. Under pressure from President Recep Tayyip Erdoğan, Turkey’s central bank has bucked the global trend of raising interest rates to tame inflation and has left its benchmark at 14 per cent since December.Erdoğan wants cheap exports and credit to power economic growth before next year’s general election. He also argues high interest fuels inflation, while economists believe the opposite is true. The Turkish president recently called those who subscribe to mainstream economic theory “either ignoramuses or traitors”.Şahap Kavcıoğlu, the central bank’s governor, last week blamed the war in Ukraine and other external factors for the surge in prices. He raised the year-end inflation forecast to 60.4 per cent from a previous 42.8 per cent and promised “a rapid fall in inflation will be achieved towards levels in harmony with our forecasts”.The steep jump in the cost of living is hitting low-income households especially hard, with housing, food and transport costs rising fastest. A third of Turks earn a net minimum wage of 5,500 lira a month, or $307 after the lira lost half of its value in the past 12 months.Goldman Sachs expects low interest rates to continue “fuelling headline inflation further and substantially derailing year-end inflation expectations. We forecast inflation to rise to 90 per cent and only fall to 75 per cent year-on-year at end-2022 with the help of base effects,” it said in a recent research note. Ayla Jean Yackley More

July imports fell to $5 billion, down 35% from June’s record monthly high of $7.7 billion, Miftah Ismail told a news conference in Islamabad.The central bank and Pakistan statistics bureau is yet to post its July data. “This is very welcoming,” Ismail said, adding it was the result of his government’s ban on all non-essential imports. “It will remove pressure on rupee,” he said. The rupee traded up slightly at 239.37 to the dollar on Friday, after shedding about 5% last week and more than a quarter of its value this year. The ban on the import of non-essential goods was lifted last week, except for automobiles, cell phones and home appliances.Ismail said his government has resolved to bring down the current account deficit significantly and to post a surplus in a year or two. The South Asian nation has fast-depleting foreign reserves and is struggling to finance a widening current account deficit, which saw a $2.3 billion surge in June, mainly due to rise in oil imports.The deficit for the financial year ending June 30 stood at $17.4 billion against $2.8 billion the previous year.Earlier in July, Pakistan reached a staff level agreement with the IMF for the disbursement of $1.17 billion under a resumed payment of a bailout package. More

BUDAPEST (Reuters) – The Hungarian forint’s slide following Russia’s invasion of Ukraine is leading some Hungarians to embrace the euro instead of the local currency, which has lost more than half of its value since Prime Minister Viktor Orban took power in 2010.Like fellow European Union members Poland, Czech Republic or Romania, Hungary is nowhere near adopting the single currency, with Orban’s government ruling out in the foreseeable future a move it says would amount to a loss of economic policy sovereignty.But the forint, which has been under pressure from Hungary’s twin deficits and a standoff with Brussels over rule of law holding up EU funds, is the region’s laggard this year again and some Hungarians are taking matters into their own hands. An April Eurobarometer survey among countries not yet using the single currency showed support for adopting it was the highest in Hungary and neighbouring Romania, where euro payments have long been the norm in used car sales and home rentals.Both the forint’s 8% slide against the euro so far this year and its volatility highlighted by its nearly 4% move over two days earlier this month, boosted the euro’s appeal even further, even though its use is still limited within the broader economy.Shortly after Russia’s invasion of Ukraine in late February, Laszlo Szucs, a lawyer at Reti, Varszegi & Partners Law Firm PwC Legal, started fielding more calls from corporate clients asking how they could compensate workers for the forint’s declines.He said most calls came from financial and business services firms and the manufacturing sector.While workers and consumers elsewhere in European countries faced similar pressures from runaway energy and food prices, the weakening forint was an additional challenge. As paying wages in euros outright is, with few exceptions, against the Hungarian law, most companies opted for extraordinary hikes worth 5-10%, while some offered end-of-quarter extra payments linked to the forint’s moves, Szucs said.The IT services sector, where many work as independent contractors and bill foreign clients in euros, switched almost entirely to euro-based contracts for new projects in Hungary over the past three to four months, he said.The National Bank of Hungary, which has been raising rates to cool prices, moving by another percentage point this week, declined comment.Available data suggests a shift to euro so far remains limited, but in some sectors businesses are already effectively pegging their prices to euros.The government said its latest available data showed the euro accounted for 35.1% of non-financial corporate deposits compared with 34.7% in January, which it said showed no evidence of an increase in euroisation.However, on Saturday Orban’s cabinet unexpectedly announced it would let companies pay taxes in euros or dollars along with forints – a move some analysts say could lessen the national currency’s significance. Graphic: The Hungarian forint’s sharp fall, https://fingfx.thomsonreuters.com/gfx/mkt/znpneawzgvl/Forint%20drop%20since%202010.png FORINT ONLY IN ‘SPECIAL CASES’Agoston Deim, who runs a small IT services firm with a partner, said he switched to pricing in euros in March when the forint tumbled through a psychological barrier of 400 against the euro.He said that while a year ago the firm rarely issued offers in euros, now they accounted for about half of turnover, with another one-fourth pegged to the euro’s exchange rate, in line with a broader industry trend.”When you cannot tell what happens the next day … and send out price offers with a one-month deadline, the risk of dealing in forints becomes just too high,” he said.Akos Deliaga, who runs Talk-A-Bot, said his IT services company, which employs 15 people, has been setting prices in euros for even longer, offering forint-based prices only in “special cases” such as in public sector orders.”Unsurprisingly, our colleagues have presented a very strong demand to be paid in euros, or at least have their salaries pegged to the euro,” he said in an emailed response.The forint’s volatility has also led some property owners in Budapest and western Hungary to quote in euros.While such offers are still a minority and mostly involve high-end properties, their numbers have tripled compared with last year, according to a survey by Hungarian real estate website ingatlan.com.”Hungarian owners do not want to squander the value of their assets,” spokesman Laszlo Balogh said. “They set it in euros, so if the exchange rate moves, they are covered.” Some dealers in a high-end furniture store in Budapest suburbs are also displaying prices in euros.Zsuzsa Mosolygo, a co-owner of Vivax, said the office furniture retailer adopted euro-based pricing last year.”An office furniture project can cost 100,000 to 200,000 euros. That is a lot easier to price in euros than having to keep adjusting prices to moves in the forint,” she said.”It is hard enough (to plan) in euros, but in forints, it would be completely impossible.” More

Sri Lanka’s new president said that securing an IMF loan would take until at least September after weeks of protests and political turmoil sparked by the country’s economic crisis.Ranil Wickremesinghe, who took over as president this month after protesters forced his predecessor Gotabaya Rajapaksa to flee the country, said in a speech that finalising the negotiations would take longer than anticipated.“I was aiming for July to reach an agreement and to get the IMF board approval by first week of August,” Wickremesinghe, who previously served as prime minister, said. “Since the incidents [earlier in July] all these will now be delayed. It will take until the end of August. Only in September that we will be able to get approval.”Wickremesinghe had previously said he wanted a deal as early as June. Sri Lanka has been hit by weeks of unrest amid widespread fury towards the government, whose economic mismanagement the protesters blame for pushing the country into its worst economic crisis in decades. Sri Lanka defaulted on its foreign debt of more than $50bn in May, the first Asia-Pacific country to do so in more than two decades, after effectively running out of foreign reserves. The lack of foreign currency for imports has triggered crippling shortages of everything from fuel to medicine, leading to a collapse in living standards.The country started negotiations with the IMF this year for a $3bn bailout, and is also in talks with other lenders including the Asian Development Bank and countries such as India and China for more financial aid.Analysts said that the government would probably need to pursue a package of painful economic reforms before finalising an IMF deal.Nandalal Weerasinghe, Sri Lanka’s central bank governor, told the FT that the government needed to push through “several tax measures, several measures to curtail expenditure and restructure state-owned enterprises”.Fitch Ratings said that while the government had a large parliamentary majority to help pass such reforms, they risked triggering more public opposition.“In the absence of an IMF deal, we expect Sri Lanka to face a very strained external position in the near term,” Fitch said in a note. “The country has little foreign exchange to pay even for essential imports such as fuel, food and medicines.”

Sri Lanka has become an extreme example of the pressures facing many developing countries after the global surge in fuel and food prices following Russia’s invasion of Ukraine, which exacerbated the financial strain caused by the Covid-19 pandemic.Several of Sri Lanka’s neighbours are also feeling the strain. Pakistan this month agreed a preliminary deal for a more than $1bn disbursement from the IMF to top up its own foreign currency reserves. And Bangladesh this week approached the IMF to begin talks over a multibillion-dollar loan.Economists said that Sri Lanka’s woes were also self-inflicted, the result of economic mismanagement and spending on white elephant infrastructure projects under the Rajapaksa family, which ruled the country for the better part of two decades.Many protesters also want Wickremesinghe to quit. Shortly after taking office, baton-wielding police cleared a big protest site in Colombo in a show of force under the new president. More